Trials of the nouveau niche

Looking to buy a property abroad?
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The Independent Online
If You have found the perfect foreign holiday spot, it is tempting to consider putting down roots there by buying a second home. Around pounds 25,000 will buy you a renovated two-bedroomed cottage with half an acre of garden in Brittany or Normandy, within easy reach of the Channel tunnel. If you have more to spend, pounds 40,000 will buy a small cottage in the Dordogne or an apartment on the Spanish costas.

France is deservedly popular with British buyers. It is close and there is plenty of choice at the lower end of the price range. "A lot of people want to spend about pounds 25,000 on a cottage," says Frank Rutherford, an agent specialising in French properties. "For that sort of money you could expect to do a bit of work - the place might need rewiring or redecorating."

These prices may sound cheap. But you should also budget for 9 per cent to 15 per cent on top of the purchase price for legal fees and hefty purchase taxes. Stamp duty in Italy is 8 per cent, while in Portugal you will pay a 10 per cent buyers' tax.

Having worked out a rough budget, decide on an area. You may think you know a place well, but it is worth visiting at different times of the year before buying.

It is the only way to spot all the potential pitfalls, according to David Franks, at Blackstone Franks, a firm of accountants that specialises in advising Britons abroad. He said: "We had a client who rented a house in Spain every winter.

"He liked it, bought it and then found that for four months of the summer there was an enormous funfair right outside."

On a more mundane level, Mr Franks says many Britons are not prepared for the haphazard water and electricity supplies in rural areas.

There are plenty of property agents in Britain willing to aid your search. Most advertise (start with Sunday newspaper property pages) and produce listings that give you an idea of what is available. Once you have a shortlist, the agency will fix up viewings through local agents.

Having decided on a property, first moves should be to open a local bank account and hire an English-speaking lawyer. For a good lawyer, try the UK property agents, local estate agents, the bank where you hope to raise a mortgage or - even better - word-of-mouth recommendations from British residents in the area. But do not leave it all up to the lawyers - invest in a book that outlines the legal and tax systems in your chosen country to make yourself familiar with key terms.

In many countries, the buyer has to pay for the services of a notary. There is no UK equivalent of notaries. They are the state's red-tape checkers, who ensure both parties and their lawyers have followed the correct procedures. The bureaucracy may seem overwhelming but your rights as a buyer are sometimes better-protected abroad than they are here. The French system, for example, has two contracts, and once you have signed the first agreement to buy, you are protected from being gazumped (being outbid) although you are free to drop out without penalty if you fail to find a mortgage offer.

Patrick Bunton, of London & Country, a firm of mortgage brokers in Bath, says that if you have equity in your home in Britain the best way of paying for a holiday home will often be to increase the mortgage on that property, taking advantage of what is a highly competitive mortgage market. It is also worth thinking carefully before borrowing in any currency that you do not have earnings in because of the exchange rate risk. For example, long-term fixed-rate loans in France are on offer at 6.5 to 7.5 per cent. But these rates would be less competitive if the pound weakened against the franc.

Many lenders have overseas subsidiaries, with Abbey National and Woolwich building society probably the most active institutions in the foreign property market. Expect, however, to face limits on how much of the property's value you can borrow. Abbey National's Italian operation will only lend up to 70 per cent of the purchase price for holiday homes and 80 per cent on French properties, regardless of whether you already have a mortgage here. In addition, says the Woolwich, which lends in Italy and France, both countries require that you spend no more than a third of your gross salary on housing costs. So you will need to deduct the costs of any existing UK loans to work out how much eligible salary you have left.

Abbey National also has an office in Gibraltar to lend in sterling to Britons buying in the main tourist areas in Spain and Portugal. It will consider lending 2.5 times the main salary plus one secondary salary, but you first have to deduct the cost of existing loans.

Be very wary of doing deals with sellers such that you declare a lower purchase price to the tax authorities and then pass the rest of the cash under the table - the vendor is trying to avoid a tax bill. This used to be a common pitfall for British buyers abroad, but the authorities have cracked down and will act when they see a suspiciously low price. Anyone who agrees to this fraud also stands to face a capital gains tax (CGT) bill back home when they sell the property. Note, too, that even if the true purchase price is declared, UK residents with second homes abroad are still liable for CGT on any increase in value when they come to sell.

Buying abroad can also affect your estate after death. In contrast to the normal UK position the law in almost every other European country follows "bloodline" inheritance rules, which means children have absolute rights to your assets. If you want to ensure your spouse gets the holiday home, you will need to make a separate will that is drawn up in the local language.

But be prepared for resistance from your lawyer. Mr Franks says: "Lawyers abroad may feel that leaving an estate to a spouse is an immoral device to cut children out from an estate . . .Where this really can be a problem is when the children of earlier marriages say they want a share of the house."

Blackstone Franks publishes guides to living in France, Spain and Portugal, pounds 6.99 each including postage 0171-250 3300; Free factsheets on buying in France, Spain, Portugal, Italy, Greece and Cyprus from solicitors Cornish & Co 0181-478 3300; The Hexacon, Rutherford's French property quarterly, phone/fax 01497-831771; Woolwich European Liaison Office 0181-298 4760; Banque Woolwich mortgage information (France only) 0990- 133665; Abbey National European Office 0171-612 4605.

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